Non-Performing Assets In Indian Banks
On August 22, 2012 in Banking, Economy by Prof. S. Srinivasan (External Contributor) The Non-Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. India’s biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector. Reasons for growing NPAs
1. Economic slowdown - The global economy is still in the throes of an economic crisis that is looming large both in the US and Europe. There is a general slackening of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures. 2. High interest rates - It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults. 3. New reporting system - Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it. 4. Aviation sector - The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly three-fourths of the top Banks’ loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par. Unfortunately, signals emanating from the power and telecom sects are not very encouraging and could further accentuate the problem of asset impairment. Conclusion
S&P, the rating agency, states that one of the redeeming features of BRIC countries' banking system, including India, is the predominant Government ownership of banks. This factor gives them resilience as the Government could bailout banks in distress. Another contributing factor to rise in NPAs is the corporate debt restructuring that was witnessed in sectors like energy, telecom etc due to high interest rates, volatile currency and commodity...
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